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Recently we have come across the same client issue rearing its head…debt collection of unpaid invoices.

It has been well reported how invoice payment dates have been pushed out, and most businesses are finding 30 day debts are now turning into 60 day debts, are turning into 90 day debts etc.

It seems everybody wants someone else to be their bank and provide credit.

Obviously there is no issue if you operate on strict payment terms – pay or don’t take the goods or receive the services. However, if you offer terms of credit – pay on the 20th of the month for example – you are, of course, bankrolling your customers.

It is critical if you want to offer payment terms that you have a robust set of terms and conditions attached. We see, time and again, clients chasing payment for invoices that have become past due with no terms of trade and simply the invoice to fall back on.

This does not mean you aren’t owed the money…far from it. What it does mean is that it becomes more expensive to collect the money you are owed in the first place. This is manifestly unfair, but is a fact of life, and can be easily rectified by simply ensuring you have terms of trade completed, and made available to your clients.

If you ever need to collect a client debt it is always beneficial to have the ability to recoup all of your costs incurred in doing so. If your clients haven’t agreed to such an arrangement then the best you will be able to do is to claim certain costs and expenses in any notice or statement of claim. These are based on scale costs and not the full amount. It is preferable to have full indemnity costs included as part of your terms and conditions.

Other examples are things like interest. You can’t charge a client interest on outstanding debt unless it is an agreed term of the contract (ie part of the terms of trade). Although you can be awarded interest on debts you have filed in Court at the prescribed rate (eg 5% for the District Court) should you be successful with your claim. When you extend credit to your clients, you are probably using your overdraft to trade and chances are you are incurring interest costs to whatever funder you use. Why should you pay interest on your borrowed funds, but those people who are using you as a bank not pay for the privilege? There are obvious reasons for not charging clients interest on overdue invoices – continued business, goodwill, and reputation are all important – but if you have the ability to do so then you can always elect to waive this right and if you make it clear to your client that have done so then this may even enhance things.

Another critical matter is security for the risk you are exposing yourself to. If you haven’t been paid, and have supplied goods or services, then should your client become insolvent all the risk is on your shoulders that you won’t be repaid. When you extend credit chances are you will have a security interest as defined in the Personal Property Securities Act 1999. There are a number of clauses that can be included in your terms of trade which protect your interest in accordance with this statute.

It’s definitely worth the investment. Basic terms of trade do not cost much to have prepared, and will save you considerably in the long run. Unfortunately we almost always end up preparing trade terms for clients as a result of them losing out due to a bad debt, or costly experience in debt collection. Better late than never I guess.

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My Business Finance is all about small business. Able to obtain flexible invoice finance and cash flow solutions, My Business Finance makes the application process simple and can have cash paid to your business account usually within 48 hours.